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So You Who Have Been Asked to Provide a Personal Guarantee?

It is a well know business practice of financiers and suppliers of goods and services that a personal guarantee may need to be provided before financial accommodation is advanced.

Such a guarantee is often executed in a form of a Deed of Guarantee and Indemnity by a director of a corporate entity or spouse of a borrower. Providing a personal guarantee often has long lasting and significant consequences for a guarantor reaching far beyond the initial transaction that triggered execution of a guarantee.

What follows is an overview of the items you should consider before you sign a personal guarantee.

So What is a Personal Guarantee?

A personal guarantee is a binding promise by a party who provides the personal guarantee (Guarantor) to be personally liable for the debt or commitment of another party (Principal) together with costs to a provider of financial accommodation (Creditor) in the event the Principal fails to pay the debt or meet the contractual commitment.

It is a form of security for the Creditor, which is often used together with registered mortgages and personal property charges.

A personal guarantee itself can be an unsecured guarantee not attached to any of property or assets. Alternatively, it can be a secured guarantee supported by a mortgage or charge over a particular property or assets.

It is important to review the terms and conditions of your personal guarantee carefully and seek legal advice before you sign to ensure that you understand the extent of your personal guarantee and risks.

Who is the Guarantor?

You may have been asked to provide a personal guarantee because you are a director of a corporate entity and the corporate entity’s financiers require additional security for the corporate entity’s borrowings. You may be a spouse of a director of a corporate entity or of an individual borrower, holding valuable assets or having access to significant funds.

In any case, remember that you are providing a guarantee in your personal capacity. This means that your personal guarantee will continue and it may be called upon by the Creditor even if you resign from your office, the corporate entity is put into liquidation or you have separated from your spouse.

Benefiting from a Guarantee

A personal guarantee is often required by the Creditor who is a financier, lessor or supplier when the Principal applies for a loan, lease or orders goods or services. Both the Principal and the Creditor benefit from your personal guarantee. The Principal will receive the loan, lease, goods or services secured by your personal guarantee. The Creditor will be able to demand from you payment of a debt owed by the Principal, seek a court judgement against you personally and enforce it, including starting a bankruptcy proceeding if the debt remains outstanding.

Releasing a Guarantee

You may be released from liability under your personal guarantee when the contract between the Principal and the Creditor is terminated and the Principal is released from the contract which you have personally guaranteed. However, this will not be the case where the guarantee is drafted to secure all future contracts and credits the Principal may have with the same Creditor in the future. In this case, your personal guarantee will continue until all such further contracts and credits are discharged by the Principal or you.

You may also be released from your personal guarantee if you obtain the consent to such release from the Creditor. In this case, you need to ensure that such consent is correctly drafted to provide full and final release from your personal liability under the guarantee. If you are discharging the guarantee by paying the debt owed by the Principal, you should request an appropriate Deed of Release or Discharge executed by the Creditor.

Withdrawing a Guarantee

You become liable upon signing a Deed of Guarantee and cannot withdraw your personal guarantee by yourself. You will have to obtain a consent of the Creditor to release you from liability or to otherwise discharge the guarantee. It is unlikely that the Creditor will agree to this unless an acceptable guarantee is provided by a new Guarantor or payment of the debt is made in full.

In some circumstances, there may be grounds to apply for a court order to set a personal guarantee aside. For example, where the guarantee was provided in unconscionable circumstances by a disadvantaged Guarantor or under undue influence or duress applied to the Guarantor.

Creditor Calling upon a Guarantee

Once the debt you have guaranteed is due, the Creditor may call upon your personal guarantee and pursue remedies against you. The Creditor is not normally required to exhaust all remedies against the Principal before calling on you to pay the debt. If there are more than one Guarantor, the Creditor will normally have the right to call on any one of the co-guarantors or all of them at its discretion.

The Creditor will normally contact you regarding the unpaid debt you have guaranteed and send you a formal letter setting out the time period to pay it and procedure to follow. You may also be approached by a debt collector who the debt has been assigned to by the Creditor.

If you have any doubt as to validity of the claim under your personal guarantee or not prepared to pay the debt within that time period, you should immediately seek legal advice before taking any further actions.

If You Receive a Letter of Demand

Locate your personal guarantee and review its terms and conditions to confirm it is valid and enforceable. Verify whether the debt is in fact due and payable by the Principal to the Creditor. Check whether the debt has been correctly calculated. Seel legal advice before your respond to any demands under your personal guarantee.

If your personal guarantee is valid and enforceable and the debt you have guaranteed is due and payable, you may be able to negotiate with the Creditor an agreement for the repayment of debt, or even an instalment payment plan, on the condition of your full and final released from liability under your personal guarantee.

Do Not Ignore a Demand or Refuse to Pay

If you ignore a letter of demand or refuse to pay the debt you have guaranteed or fail to pay it within certain period of time, the Creditor may commence court proceedings against you pursuant to your personal guarantee for the amount owed plus interest and costs. If successful, the Creditor will be able to rely on the court order to obtain a garnishee order to debit money from your bank account or to redirect your salary directly from your employer, to obtain a warrant for seizure and sale of your possessions and land, to apply to court for appointment of a receiver to manage your finances and assets, to issue a bankruptcy notice against you.

Claiming Back if Payment is Made Under a Guarantee

If you pay the debt pursuant a valid claim under your personal guarantee, you can ask for reimbursement of the paid money from the Principal. However, if the Principal does not have sufficient funds you may have difficulties to receive your money back. The Principal may be in liquidation, in which case you can lodge a claim with the liquidator for payment of your money. However your claim will be one of an unsecured creditor and will depend on whether there are any funds left in the liquidation after payment of liquidator’s fees and costs and payments to priority and secured creditors.

Protect Your Assets if You Provide a Personal Guarantee

Seek legal advice and put in place an asset protection strategy in advance to protect your assets against risks arising out of potential claims by your creditors including those claiming under personal guarantees you may provide in the future.

Furthermore, seek legal advice in relation to any guarantee you wish to sign to be in a position to make an informed decision whether to provide the guarantee. It may well be that you can limit the extent of your guarantee or negotiate conditions of release with the Creditor. This can reduce your costs and prevent unnecessary stress in the future.

Once you have signed a personal guarantee, it is very unlikely that you will have sufficient grounds to avoid your liability for the debt you have guaranteed, even if your circumstances have changed and you are no longer associated with the Principal. Therefore, always keep a copy of a guarantee you sign to know exactly the extent, terms and conditions of your liability.

Business Lawyers Sydney at Pavuk Legal can assist you with legal advice in relation to a personal guarantee you have been asked to provide. We can also assist you with negotiating the terms and conditions of your personal guarantee to limit your liability and can fully explain the consequences of signing the personal guarantee and advise you how to protect your assets.

We can further provide legal advice regarding the options available to you if you have received a demand for payment pursuant to your liability as a personal guarantor.

Furthermore, we can advise you and structure your asset protection strategy now to ensure your wealth is not at risk if you provide a personal guarantee in the future.

Pavuk Legal can assist with the above and many other legal aspects.

Many other essential hot topics for business owners is all found in the book Nobody Else’s Business. Nobody Else’s Business is about helping business owners live the life they want to live, now and in the future. It is the ultimate guidebook for succession planning of modern Australian businesses.